Inflation protection

Do you remember when air was free at the gas station? Now it costs $1.00. You know why?

Inflation. 😀

It’s crazy to realize that the dollar has lost over half its value during my lifetime so far. One dollar in 1987 could buy what $2.33 can buy today. This is why everyone should hedge against inflation.

Last month I blogged about the rising risk of inflation and to keep an eye on the Consumer Price Index (CPI). Well, the most recent data just came out for last month. And it appears inflation is heating up!

We are coming out of a recession, and the economy is slowly opening back up. So a higher CPI isn’t a surprise. It’s still a concern though. Inflation is usually tame and not noticeable short term. But it has detrimental long term effects as it erodes the purchasing power of savings.

So in today’s post I’ll point out 8 investments to hedge against inflation.

8 hedges against inflation

1. The stock market. A strong long term solution to inflation.
2. Short term bonds. This historically beats stocks when inflation rises.
3. Real return bonds (RRB) or Treasury Inflation-Protected Securities (TIPS).
4. Precious metals such as gold and silver.
5. Shorting the currency, which means taking on debt, (hinted by the video thumbnail.)
6. Land and property. Prime real estate will always be in demand.
7. Alternative investments such as fine art, wine, rare collectables, and cryptocurrencies.
8. Human capital. Productivity is a great answer to inflation. Invest in yourself to maintain your earning power regardless of how much the currency devalues. Your economic security isn’t your job. It’s your own ability to create, to learn, to adapt, and to produce wealth.

For a more detailed explanation of each one you can watch my latest video on inflation here. Or see below. 🙂

How I am positioning my portfolio

Here’s a look at my current asset allocation.

I feel I am adequately diversified. But I plan to buy some short term bonds moving forward.

I will likely do this with the Vanguard Canadian short-term corporate bond ETF (VSC). The management expense is 0.10%, and it has $1.2 billion of assets under management. The US equivalent is (VCSH) on the Nasdaq.

Why have I made this decision? If inflation continues to run higher, short term bonds have 2 main advantages.

1. They have historically outperformed stocks during a rising inflationary environment. I explain in the video that in the 1970s short term bonds returned over 7% a year, while stocks only returned about 2%. This is likely because many publicly traded companies find it difficult to adapt to higher wages and other input costs. On the other hand, since short duration bonds mature quickly, they can be rolled over and reinvested to take advantage of higher interest rates.
2. If the stock market goes down I can sell my short term bonds, which will probably hold their value, and rebalance by purchasing stocks. This makes short term bonds a great strategic holding for added flexibility, and not necessarily for holding long term.

It’s important for everyone to understand the effects of inflation and what to do about it. Make your money work for you, or else it will erode away. 🙂

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Random Useless Fact: